China charges Microsoft $137 million in back taxes

The Chinese government has levied $137 million in back taxes and interest against the company, according to a report by China’s Xinhua state news service.

The report doesn’t identify Microsoft by name, labeling the target of the fine as “M,” described as a world-renowned U.S.-based company that started its Chinese subsidiary in 1995. Microsoft launched Microsoft (China) Co Ltd. in Beijing in 1995.

Xinhua’s report said that the company’s Chinese unit was losing money on paper, even as the Chinese subsidiaries of other firms in the industry were profitable. The investigation, Xinhua said, found the company was shipping its profits overseas in avoidance of domestic taxes.

Microsoft didn’t confirm or deny that it is the company in Xinhua’s report.

A company spokesman said in a statement that Microsoft’s tax bill for transferring goods and services between its Chinese and other subsidiaries had been ironed out ahead of time by a 2012 agreement between U.S. and Chinese tax authorities.

“The agreement is an acknowledgment by both countries that Microsoft’s profits are subject to the appropriate tax in China,” Microsoft’s statement said. “China receives tax revenue from Microsoft consistent with the terms of the agreed advanced pricing agreement.”

As part of the deal to pay back taxes, Beijing estimates the company will pay about $16 million in additional annual taxes in future years, the Xinhua report said. Microsoft doesn’t disclose the financial results of its international units.

Microsoft says its effective tax rate in the year ended in June was 21%, below the U.S. corporate rate of 35%. The company said it paid a lower rate because it distributes and produces some of its products through subsidiaries in Ireland, Singapore and Puerto Rico.

China isn’t the only country scrutinizing Microsoft’s transfer of profits between its international units. The Internal Revenue Service is taking a look at how Microsoft accounted for sales between its subsidiaries between 2004 and 2009.

China has been a challenging market for Microsoft. The fast-growing economy, now the world’s second largest, is a huge potential market for Microsoft hardware and software. But government censorship, weak intellectual property protection and widespread software piracy have limited the success of Microsoft and other Western technology firms in the country.

Microsoft is also caught up in Beijing’s crackdown on international technology firms, including Qualcomm and InterDigital. A Chinese regulator said it began an investigating Microsoft for potential monopolist practices in June. China’s procurement agency in May said it wouldn’t buy hardware that runs on Microsoft’s Windows 8 operating system.

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Welcome to Microsoft Pri0: That's Microspeak for top priority, and that's the news and observations you'll find here from Seattle Times technology reporter Matt Day. Send tips or comments to mday@seattletimes.com.